‘Scale plays key role in positioning of banks’

With credit to the agricultural sector rising to 3.7 per cent last year, banks, including Sterling Bank, Plc have been bullish on keying into the Federal Government’s agric transformation agenda by developing special products to drive this initiative. In this interview with the Managing Director of Sterling Bank, Mr Yemi Adeola, whose bank is in the market to raise N12 billion via rights issue, spoke to a select group of journalists on many issues in the industry and the economy. Group Business Editor AYODELE AMINU was there.

The primary market has been inactive for several years, and Sterling Bank is the first bank to undertake equity issue in several years. What gives you the confidence to come to the market at this time?

As you know, investors’ confidence took a big hit following the 2008/09 financial crisis. However, recent reforms by the capital market authorities have begun to yield dividends, restoring confidence to the market which has witnessed a resurgence of key indices to pre-crisis levels.

On what gives us the confidence to approach the market at this time? We have never been in doubt about the value of the franchise. Rather, we have been mindful of the need to get a good valuation for the stock in order to preserve shareholders’ value. We believe that stock valuations are closer to their true values than they have been for some years and companies with good fundamentals would be rewarded appropriately by the market.

Sterling Bank has a compelling business model that is resilient. The bank continues to post high returns despite its limited capital. In the last three years, the bank achieved an average Return on Average Equity (RoAE) of 18 per cent. We have our shareholders’ backing that this is the appropriate time to raise the additional capital for the franchise’s development plans.

Beyond the rights issue, what’s the extent of your capital raising exercise and how are you going to achieve these?

The Rights Issue is part of our overall capital raising programme: • $200 million (N30 billion) in tier 1 capital comprising $80 million through Rights Issue and $120 million through Private Placement by September 2013.

• $200 million in tier 2 capital through multicurrency debt issues expected to come through by Q1’ 2014

How will the additional capital impact on the performance of the bank?

These funds would be deployed to key areas of our business to deepen our retail penetration and fast-track our expansion plans. Specifically, we would be enhancing our technology infrastructure, expanding our branch network and our alternative channels as well as remodelling our existing branches to capture a more retail appeal. The bank also plans to increase its lending in the corporate banking and agric space, which is limited due to capital restraints.

These investments should positively impact our retail footprint and profitability. We are keen to build a franchise that would outlive the managers.

What attractions are in this rights issue for shareholders?

With an average RoAE of 18 per cent over the last three years, we believe that there is a compelling business case for discerning investors to take part in the programme. The financial year also appears very promising with a RoAE of 23 per cent in the first quarter, and we are on track to close the year with a RoAE of at least 20 per cent. We expect to sustain this performance in the coming years.

You have made quite ambitious forecasts for this rights issue. What assurances can the public count on these?

On the contrary, we believe that the forecasts are conservative, driven by realistic assumptions. Moreover, the bank has an experienced management team with a proven track record of performance.

How immune is Sterling Bank to industry policy variations? Can we count on the bank to survive any major policy changes in future?

We must commend the monetary authorities for the excellent work they have done to stabilise the financial system. The industry has, indeed, come a long way and we believe that lessons have been learnt by key stakeholders to forestall drastic policy changes that could reverse the positive strides in recent years, which have received global acclaim.

However, we understand that factors beyond the immediate industry environment could also impinge on industry fortunes and without sounding immodest, we can say definitively that we are prepared for these as well. We have a resilient business model that is designed to withstand a challenging business environment. You would recall that Sterling Bank was one of the first 10 banks adjudged to have passed the CBN’s 2009 stress test at the height of the nation’s financial crisis.

How has the divestment from your previous non-commercial banking subsidiaries impacted on the bank?

Our divestment exercise was managed in a professional manner and at a profit to the bank. Indeed, the bank’s 2011 financials was positively impacted by the sales of the subsidiaries. However, we retain very robust and mutually beneficial relationships with these companies as we see continuing value in our relationship.

You had recently leveraged on acquisition. Will you consider further acquisition?

Historically, inorganic growth has played a significant role in the emergence of Sterling Bank as a significant player in the banking industry. We have also built internal capacity to rapidly translate the gains from such exercises into enhanced profitability for shareholders’ benefit. Consequently, while we are on track to achieve our medium and long-term objectives without the need for an acquisition, we would remain open to such opportunities in the near to long term.

Beyond the general shareholders’ acclamations at the annual general meeting, do you have firm assurances of your core shareholders on this capital issue?

We have no doubts about the willingness of the bank’s shareholders to exercise their rights as they see immense opportunities for enhancing the value of their stakes in the business.

What are the strategic goals of Sterling Bank in the medium to long-term?

We believe that scale plays an important role in the competitive positioning of any player in the banking industry. Consequently, we have set for ourselves a target of at least five per cent market share (measured by assets) by 2016.

What is Sterling Bank doing to support small and medium scale enterprises (SME)?

We have several success stories in this respect and we are strengthening structures to deepen our engagement with SMEs. We have also recently launched products aimed at providing solutions for players in this market segment from the SUPA account to specific product programmes tailor made to the unique funding requirements in specific markets.

In the next five years, where do you see Sterling Bank in terms of industry ranking?

As I stated earlier, our target is to achieve a market share (measured by assets) of five per cent by 2016.

How robust and sustainable is your corporate governance structure?

Sterling Bank’s Board of Directors is composed of competent individuals with diverse professional backgrounds and management experience. Indeed, our corporate governance structure is one of the strengths of the organisation and has been invaluable in building institutional resilience and focus.

On a personal note, what kind of leader are you?

One of Sterling Bank’s core values is team work. At Sterling Bank, we believe in a participatory and consultative management where employees are allowed to air their views on issues affecting their productivity in the workplace as well as those of our customers. It is this kind of environment that aids ideas generation and transforms average organisations into world-class institutions. I am conscious of this and recognise my role as the rallying point for staff and customers to express their views and ideas.